ordered the defendants to make available Hi-Pro's books and records and provided for the depositions of Scalice and Ehrenreich no later than June 2, 1993.
After a discovery dispute arose among the parties, United States Magistrate Judge Dennis M. Cavanaugh on May 28, 1993 ordered that Ehrenreich make himself available for a deposition in Illinois on Memorial Day, May 31, 1993. Ehrenreich, however, did not comply with Judge Cavanaugh's order and has not yet been deposed. The Court has warned Ehrenreich and the other parties that it will not condone further disregard of such an order.
Bosworth now applies for immediate injunctive relief. He alleges that the actions of the defendants at the May 21, 1993 meeting, at which he was purportedly terminated as a Hi-Pro employee, were "oppressive" under Illinois law. He seeks either a provisional director, appointed by the Court to resolve the deadlock on the board of directors, or, alternatively, to have his stock purchased at fair value by the defendants.
Ehrenreich has filed a signed declaration in opposition to Bosworth's request for injunctive relief. Scalice has filed a brief and an affidavit of Edward F. Clark, Esq., in opposition. Scalice has also filed a motion to stay this action pending arbitration. He asserts that the disputes raised in Bosworth's verified complaint must be arbitrated in accordance with Article 13 of the Shareholders' Agreement.
The parties also disagree on Scalice's status with the corporation. Bosworth argues that Scalice should not longer act as a director, as he resigned February 10, 1993. According to both Scalice and Ehrenreich, however, Scalice did not resign and continues to hold a director's position.
For the reasons discussed below, the Court agrees with Scalice that Bosworth's complaint is arbitrable and concerns issues which must be resolved by a New York arbitrator. This Court, however, does not have the power to compel arbitration outside the District of New Jersey. Under the Federal Arbitration Act, 9 U.S.C. § 1 et seq., any petition to compel arbitration or confirm an arbitration award must be filed in the Southern District of New York. The Court, therefore, transfers venue in this action under 28 U.S.C. § 1406(a) to the Southern District of New York.
The Court, however, is extremely concerned about irreparable harm to the corporation Hi-Pro, and indirectly, to the three co-owners, Bosworth, Scalice and Ehrenreich, which will result unless the present state of corporate chaos is brought under some semblance of control. Therefore, the Court will appoint a provisional director, with two votes, to help stabilize the corporate operations pending arbitration.
The Court, furthermore:
(1) permits Scalice to serve as a director and to serve as President;
(2) permits Bosworth and Ehrenreich to continue as voting members of the board of directors;
(3) orders that the board of directors make only routine business decisions pending the arbitration, unless the corporation's financial stability requires emergent action; and
(4) restrains the parties from implementing the resolutions and/or agreements of Scalice and Ehrenreich, as reflected in the minutes of the May 21, 1993 "directors' meeting."
A. Federal Arbitration Act
Congress has enacted the Federal Arbitration Act, 9 U.S.C. § 1 et seq., "to reverse the longstanding judicial hostility to arbitration agreements that had existed at English common law and had been adopted by American courts, and to place arbitration agreements upon the same footing as other contracts." Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 114 L. Ed. 2d 26, 111 S. Ct. 1647, 1651 (1991). Section 2 of the Act provides that "[a] written provision in any . . . contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2.
The parties do not dispute that the Shareholders Agreement for Hi-Pro Marketing, a closed corporation which distributes products nationally, is a transaction involving interstate commerce. Therefore, the Court must look to the Federal Arbitration Act to determine the effect of the arbitration clause in Article 13. See Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 74 L. Ed. 2d 765, 103 S. Ct. 927 (1983). The Act applies even though jurisdiction in this case is based on diversity of citizenship. See Painewebber, Inc. v. Hartmann, 921 F.2d 507, 510 (3d Cir. 1990) (citations omitted).
Having reviewed the verified complaint, the Court concludes that all three counts are arbitrable under the broad language in Article 13 of the Shareholders Agreement. Article 13 provides, in part:
Any controversy arising out of or relating to this Agreement or any modification, extension or termination thereof, including any claim for damages and/or recission, shall be resolved by arbitration in New York, New York in accordance with the Rules then obtaining of the American Arbitration Association. The parties consent to the jurisdiction of the Court of the State of New York, County of New York, and of the Federal District Court of the Southern District of New York, for all purposes in connection with such arbitration . . .
(Exhibit A of Affidavit of Edward F. Clark, Esq.)
Section 4 of the Act allows a litigant to petition a federal district court to enforce an arbitration agreement. See 9 U.S.C. § 4 A district court, before compelling an unwilling party to arbitrate, "must engage in a limited review to ensure that the dispute is arbitrable--i.e., that a valid agreement to arbitrate exists between the parties and that the specific dispute falls within the substantive scope of that agreement." Painewebber, 921 F.2d at 511. If the court finds that the dispute falls within the scope of the arbitration agreement, it may not consider the merits, but must refer the matter to arbitration. Id.
The Court operates under "a presumption of arbitrability in the sense that 'an order to arbitrate the particular grievance should not be denied unless it may be said with positive assurance that the arbitration clause is not susceptible of an interpretation that covers the asserted dispute." Id., (quoting AT & T Technologies v. Communications Workers of America, 475 U.S. 643, 650, 89 L. Ed. 2d 648, 106 S. Ct. 1415 (1986)) (emphasis in original). The parties here dispute whether it may be said with "positive assurance" that the dispute falls outside the substantive scope of the agreement.
The Court finds that the Article 13 arbitration clause is broadly worded. It refers to "any controversy arising out of or relating to this Agreement or any modification, extension or termination thereof." Compare Goodwin v. Elkins & Co., 730 F.2d 99, 109-110 (3d Cir.), cert. denied, 469 U.S. 831, 83 L. Ed. 2d 61, 105 S. Ct. 118 (1984) (clause which stated "any controversy arising hereunder" considered broad in sweep). Furthermore, the plaintiff, John Bosworth, bases his complaint in significant part on the defendants' Ehrenreich and Scalice on May 21, 1993 attempting to terminate his relationship to the corporation and therefore modify the agreement, of which Bosworth is a signatory.
Bosworth has acknowledged at page 15 of his brief that Count III, which asks the Court to restrain the defendants from terminating his employment, is arbitrable. He argues, however, that the provisions of the Shareholders Agreement are "not relevant" to Counts I and II. Therefore, he asserts that the Court should stay arbitration on Count III, pending a judicial resolution of Counts I and II. See Dickinson v. Heinold Securities Inc., 661 F.2d 638, 644 (7th Cir. 1981). The Court disagrees.
In Count I of the complaint, Bosworth seeks a Court-ordered purchase of his stock by the defendants, alleging that the purported termination of Bosworth on May 21, 1993 was illegal and oppressive. In Count Two, he seeks the appointment of a provisional director, alleging that he and Ehrenreich are hopelessly deadlocked in trying to operate the corporation.
Applying the generous standard of AT & T Technologies, the Court cannot see how Bosworth can provide "positive assurance" that there is no reasonable interpretation of the Article 13 that would include the disputes described in Counts I and II. This article sweeps very widely. The Court finds the language "any controversy arising out of or relating to this agreement" in Article 13 can be reasonably interpreted in cover both Bosworth's termination and the purported deadlock on the board.
Having concluded that all three counts of Bosworth's complaint fall within the Article 13 arbitration clause, the Court must now consider Scalice's motion to stay the action pending arbitration. As a threshold matter, the Court concludes that Scalice is also moving to compel arbitration. Although his motion does not specifically request this relief, his brief at pages 13-14 strongly imply that he seeks this relief.
The Court is faced with a dilemma: Article 13 provides for arbitration in New York City. However section 4 of the Arbitration Act provides that arbitration must take place "within the district in which the petition for an order directing such arbitration is filed." 9 U.S.C. § 4. Therefore, only the federal district court for the Southern District of New York could compel arbitration in that district.
In Econo-Car International v. Antilles Car Rentals, 499 F.2d 1391, 1394 (3d Cir. 1974), the Third Circuit held that the district court in the Virgin Islands could not compel arbitration in New York, despite the arbitration clause. As a general rule, the place where the petition is filed determines the locale for arbitration. See Alpert v. Alphagraphics Franchising, 731 F. Supp. 685, 689 (D.N.J. 1990) (citation omitted). The federal courts, however, have generally attempted to carry out the terms of the parties' freely negotiated arbitration agreements. Id.
This Court sits in New Jersey and cannot compel arbitration in New York. Article 13, however, provides for arbitration in New York, within the Southern District of New York. Furthermore, the Third Circuit in Econo-Car did not reach the issue of whether the Virgin Islands district court could have compelled arbitration in its own district, when the arbitration clause provided otherwise. Other courts have expressed concern that a district court by ignoring an arbitration clause and compelling arbitration in its own district would encourage forum shopping by plaintiffs dissatisfied with the forum selection clause. See Alpert, 731 F. Supp. at 689 (citing cases).
Therefore, the Court may not compel arbitration in New York and will not, even if it could, compel arbitration in New Jersey. The Court, therefore, will transfer venue to the Southern District of New York under 28 U.S.C. § 1406(a), to further the intent of the parties as expressed in Article 13 of the Shareholders Agreement.
Lastly, the Court must consider whether, pending the commencement of arbitration proceedings in New York, equity requires that certain preliminary restraints be imposed. Even in a dispute which is considered arbitrable under the Federal Arbitration Act, a district court has the power to order preliminary relief, in order that the arbitration itself is not a "hollow formality." See Ortho Pharmaceutical Corp. v. Amgen, Inc., 882 F.2d 806, 811 (3d Cir. 1989); Roso-Lino Beverage Distributors v. Coca-Cola Bottling Co., 749 F.2d 124, 125 (2d Cir. 1984) (per curiam).
As Bosworth notes at page 16 of his brief, the Article 13 arbitration clause does not bar the Court from granting preliminary injunctive relief. The article states that "any provisional remedy which, but for this Agreement to arbitrate disputes, would be available at law, shall be available to the parties hereto pending arbitration."
The Third Circuit has stated that a district court, in determining whether to impose preliminary restraints pending arbitration, should use the analysis ordinarily employed for applications for preliminary injunctions. Ortho, 882 F.2d at 812-13. For the following reasons, the Court concludes that such relief is appropriate here.
B. Preliminary Injunction Analysis
The Third Circuit considers injunctive relief "an extraordinary remedy." Instant Air Freight v. C.F. Air Freight, 882 F.2d 797, 800 (3d Cir. 1989) The moving party must demonstrate (1) a likelihood of success on the merits and (2) the probability of irreparable harm if relief is not granted. In re Arthur Treacher's Franchisee Litigation, 689 F.2d 1137, 1143 (3d Cir. 1982). If relevant, the Court may also consider (3) the possibility of harm to other interested persons and (4) the public interest. Kershner v. Mazurkiewicz, 670 F.2d 440, 443 (3d Cir. 1982) (in banc).
1. Likelihood of Success on the Merits
Bosworth must establish a "reasonable probability of eventual success in the litigation." Kerschner, 670 F.2d at 443. The Third Circuit has said:
it is not necessary that the moving party's right to a final decision after trial be wholly without doubt; rather, the burden is on the party seeking relief to make a prima facie case showing a reasonable probability that it will prevail on the merits.
Oburn v. Shapp, 521 F.2d 142, 148 (3d Cir. 1975).
As a threshold matter, the Court concludes that the Illinois corporate statutes apply here. First, Hi-Pro was incorporated in Illinois. Second, Article 14 of the Shareholders Agreement provides that the agreement "shall be governed by and construed and enforced in accordance with the internal law of the State of Illinois applicable to agreements made and to be performed entirely in Illinois, without regard to any principles of conflicts of law. (Shareholders Agreement at 18) (emphasis added).
Under Section 12.55 of the Illinois Business Corporation Act, a trial court may, in lieu of dismissing the action or ordering dissolution of the corporation, appoint a provisional director. Ill. Ann. Stat. ch. 5, para. 12.55(a)(1) (Smith-Hurd 1993). The trial court has the discretion to appoint a provisional director "if it appears that such action by the court will remedy the grounds alleged by the complaining shareholder to support the jurisdiction of the court under Section 12.50." Ill. Ann. Stat. ch. 5, para. 12.55(b).
Section 12.50 sets for the grounds for judicial dissolution of a corporation. Subsection (b) of that section provides that, to establish grounds for dissolution, a shareholder must show either:
(1) The directors are deadlocked, whether because of even division in the number thereof or because of greater than majority voting requirements in the articles of incorporation or the by-laws, in the management of the corporate affairs; the shareholders are unable to break the deadlock; and either irreparable injury to the corporation is thereby caused or threatened or the business of the corporation can no longer be conducted to the general advantage of the shareholders; or